Best practice benchmarking: a proven road to world-class performance; Best practice benchmarking has been embraced by a number of leading companies, in both good times and downturns. It can lead to marked improvements in specific metrics--but it is a journey, not an event.

  "If you don't know where you're going, any road will take you there."
  George Harrison, former Beatle, "Any Road"

The benchmarking concept, a familiar one to most executives, keeps gaining converts. Bain & Co.'s most recent Management Tools study, which charts the tools that companies use to set strategic direction, finds that for the past four years, benchmarking has held steady in second place, with 84 percent of all surveyed companies using it. Only formal strategic planning surpassed benchmarking in the ranking.

Moreover, the Harvard Business School's Harvard Management Update has characterized benchmarking as increasingly important for any business unit interested in documenting its contribution to corporate performance, regardless of current economic conditions.

During the economic downturn beginning in the late 1990s, The Hackett Group observed that interest in benchmarking grew sharply, particularly among forward-looking executives seeking effective strategies for weathering the recession, not just cutting headcount. Further, research shows that CFOs, CIOs and other functional leaders traditionally turn to benchmarking during times of economic expansion, in order to identify the most promising ways to meet growth targets.

Unquestionably, when done correctly, benchmarking also helps create a compelling case for change by putting current and optimal performance measures in black and white: "If I implement shared services, it will cost me X and I can expect a return of Y within a period of Z."

The opportunity for generating cost savings, other efficiency-driven improvements and effectiveness enhancements, driven by the insights that benchmarking can provide, is clear.

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An analysis of the most recent finance benchmarks in the 2005 Hackett Book of Numbers finds that world-class performers spend 42 percent less than typical companies on their finance operations as a percentage of revenue (see adjacent chart) and operate with less than half the staff of their peers. At the same time, they close their books more quickly each month, and historically have generated significant additional savings through reducing effective tax rates and days sales outstanding.

The critical differentiator of successful benchmarking is the relevance of data comparisons. A detailed process architecture and rigorous process taxonomy must be applied in order to enable meaningful and relevant comparisons between diverse companies. Only in this way can companies understand exactly what others are doing differently--and better.

Business terms, even those as common as "customer" or "employee," are used daily in virtually every business context, yet they often have very different meanings for different people--even within the same company. Benchmarks should take a process view of the delivery of services, rather than a functional view. They should capture data for full-time equivalent (FTE) employees, regardless where they report in the company.

For a variety of reasons, functions and activities may vary in organizational structure, and may be called by different names even within the same organization. To reconcile these differences and enable "apples-to-apples" comparisons from function to function, a detailed and comprehensive process taxonomy is necessary. Hackett's process taxonomy, for instance, covers nine functions and 74 discretely defined process groups across sales, general and administrative (SG & A) and supply chain.

Once data is captured, the way in which it is analyzed is also critical. Hackett's Value Grid scores performance metrics associated with efficiency on the horizontal, or "X," axis. These may include such output measures as finance cost as a percent of spending and monthly closing times.

Performance metrics associated with effectiveness are scored on the vertical, or "Y," axis. These may include such output measures as training hours per associate, or staff allocated to decision support, or confidence in financial reporting and forecasting outputs. Each company is ranked relative to the others. Companies above the breakpoints of the top quartiles in both efficiency and effectiveness are designated as "world-class."

To be clear, efficiency and effectiveness have very different meanings; these words are often used interchangeably and erroneously. Efficiency can be described as "doing things right," with the associated metrics around costs and cycle time. Effectiveness means "doing the right things," with corresponding metrics oriented to accuracy and other quality measures.

Both concepts represent business value. For example, highly efficient organizations cost less, enabling investment in other activities that generate competitive advantage. Alternatively, highly effectiveness organizations deliver value-added services to their stakeholders, resulting in better decision-making, time-to-market and reduced error rates.

In reality, few companies represent a fully "either/or" situation--that is, few focus entirely on efficiency or entirely on effectiveness. Research suggests that effectiveness-oriented organizations make investment decisions based primarily on quality and value, and only secondarily on how those investments may impact costs or productivity.

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Efficiency-oriented organizations, on the other hand, typically make decisions based on whether and how soon they will receive a payback in the form of reduced cost. By and large, executives will find that their company's business goals require them to improve both their efficiency and their effectiveness.

And therein lies the challenge: targeting and establishing the correct balance between the two. Over the years, leaders have shown that achieving world-class performance is a journey, not an event. There is no silver bullet, no single "solution" that can take organizations to world-class performance levels.

RELATED ARTICLE: Best Practice Benchmarking vs. Competitive Benchmarking

Benchmarking--defined as a systematic way to compare processes and practices in order to improve an organization's performance--can be traced back several hundred years. After World War II, the practice was advanced by the Japanese, who toured businesses around the world in large numbers, looking for concepts that they could adopt within their own organizations to reduce costs and improve productivity.

In the 1960s, IBM Corp. gained major international advantage through internal benchmarking, using it to identify and set corporate standards. But benchmarking did not come into its own as a widely admired and utilized management tool until the 1970s, after Xerox Corp. began benchmarking its U.S. products against those of its Japanese affiliate, Fuji-Xerox.

The improvements that came out of the program were so substantial that Xerox adopted it as a core driver in its worldwide improvement efforts, and today the company is credited with introducing the concept to the broader business community.

There are two primary types of benchmarking: competitive benchmarking and best practice benchmarking. The goal of competitive benchmarking is to assess your advantages and disadvantages by comparing them with those of direct competitors. Best practice benchmarking, by contrast, is designed to identify world-class performers and the specific underlying best practices they utilize that will enable your company to realize similar world-class results.

It is natural for companies to want to benchmark their performance against a handpicked group of major competitors. However, depending on individual objectives and business strategy, different companies, even within the same industry, have different strategic goals. Assessing potentially effective best practices is possible only by looking at companies outside one's own industry to see what innovators are doing elsewhere.

For example, when Xerox benchmarked its logistics process, it did so against L.L. Bean, a world leader in logistics and distribution. Best practice benchmarking across industry lines allows companies to leapfrog their competitors.

Certainly, there are times when competitive benchmarking is appropriate. It is typically focused on areas that are core competencies in one's industry, such as supply chain, manufacturing or engineering. On the other hand, best practice benchmarking is typically focused on areas that are important to an organization, but is usually not the source of competitive advantage, such as finance and human resources.

Despite the temptation to focus on the immediate future, true competitiveness comes from positioning the company for the long term. The goal of best practice benchmarking is to emulate the specific structural factors adopted by market leaders that enable them to respond to demands for service. Process excellence leads to excellence at the enterprise level. It is these well-controlled, well-managed companies that are best positioned to use the tools available to them to gain a stronger market position.

RELATED ARTICLE: takeaways

* Benchmarking has shown consistent growth in recent years, whatever the financial environment at the time.

* The opportunity for generating cost savings, other efficiency-driven improvements and effectiveness enhancements through benchmarking is clear.

* Best practices benchmarking focuses on metrics produced by leaders in a specific field or practice, not leaders in a company's own industry.

* There's an important distinction between efficiency, or "doing things right," and effectiveness, or "doing the right things." Each is measured on a different axis.

Richard T. Roth is Chief Research Officer of The Hackett Group, an Atlanta-based business process advisory firm and a recognized leader in best practice research, benchmarking and transformation advisory services. He can be reached at 770.225.7300.